Finance: IRR, WACC, NPV, which project to accept

Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

a. Both projects have a positive net present value.
b. Project A must have a higher NPV than Project B.
c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than Project A.
d. Statements a and c are correct.
e. Statements a, b and c are correct.

Project X and Y have an IRR of 20% and 15% respectively. Both projects have a positive net present value. Which of the following statements is most correct?

a. Project X must have a higher NPV than Project Y.
b. If both projects have the same WACC, Project X must have a higher NPV.
c. Project X must have a shorter payback than Project Y.
d. Project X payback is shorter because it considered cash flows beyond the payback period.
e. None of the aobve answers is correct.

A company estimates that its WACC is 10 percent. Which of the following independent projects should the company accept?

a. Project A requires an up front expenditure of $1,000,000 and generates an NPV of $3000.
b. Project B has a modified internal rate of return of 9.5%.
c. Project C requires and up front expenditure of $1,000,000 and generates an IRR of 9.7%.
d. Project D has an IRR of 9.5%.
e. None of the projects above should be accepted.

Solution Preview

Project A has an internal rate of return of 15 percent. Project B has an IRR of 14 percent. Both projects have a cost of capital of 12 percent. Which of the following statements is most correct?

a. Both projects have a positive net present value.
This is correct as IRR > WACC for both projects

b. Project A must have a higher NPV than Project B.
Not necessary For example, we may have
Year Project A Project B
0 -100 -10000
1 +115 +11400
Here the NPV of B will be higher.

c. If the cost of capital were less than 12 percent, Project B would have a higher IRR than ...

Solution Summary

The solution shows all the calculations together with explanations to arrive at the correct answers.